Amazon (AMZN) – Get a free report the stock peaked throughout the pandemic and fell back to pre-pandemic levels. That should indicate that the stock is cheap and will soon find its way back up, right? Well, not according to this analyst.
Seeking Alpha contributor “Tradevestor” compared the last time Amazon shares traded at $88, in 2019, to the current scenario. The author believes that the market conditions that allowed the stock to climb to its peak during the 2020-2021 shutdowns are very different from those the company faces today. Here’s why.
Figure 1: Sell AMZN? Why This Expert Thinks Amazon Is Still Overpriced
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Deterioration of the fundamentals?
The main bullish argument for Amazon concerns the strength of its flywheel.
The company’s e-commerce business is able to deliver virtually any product consumers need, anywhere, anytime.
Core features like Prime Video and Prime Music, and even physical products like Kindle and Echo Points (and Alexa, by extension), have helped lock in customers.
And finally, Amazon’s advertising business completes the circle of monetization.
However, the e-commerce segment is continually bleeding from macroeconomic headwinds. Although the advertising arm is a fast-growing, high-margin business, it’s still not reliable enough to be Amazon’s salvation.
Why?
Advertising is directly related to Amazon’s ability to sell in the marketplace. If e-commerce performance drops, how long will it be before advertisers start paying less to advertise on Amazon’s platform?
Finally, when e-commerce fails, investors tend to turn to the cloud arm of the business: Amazon Web Services (AWS). Amazon’s cash cow contributed the most to the company’s operating profit throughout 2022. However, AWS showed its first sign of fatigue – which Tradevestor sees as a natural consequence of the market.
“There is no denying that the AWS slowdown is concerning. But this is to be expected as the wave of new and existing businesses moving to the cloud during the peak of COVID was never going to continue,” the analyst wrote.
Natural consequence or not, we may see a crack in Amazon’s flywheel strategy as its growth lines dry up. If the company is not ready to grow revenue and margins as expected, the stock will most likely continue to move sideways.
Multiple compression
For those unfamiliar with the term, multiple compression is a phenomenon that occurs in either of two scenarios: (1) a company’s earnings increase while its stock price remains stable; (2) a company’s earnings remain stable, but its share price falls.
The consequence in both cases is that the company’s price/earnings (P/E) multiple also plunges.
“As the number of competitors and the strength of existing competitors increase, it would be a huge challenge for incumbents (AWS) to maintain market share, let alone continue to grow at the same rate. Although the ads are loud right now, just ask Metaplatforms (META) – Get a free report and Google (GOOGL) – Get a free report about the downsides of an ad-dependent revenue stream,” they argued.
Is Amazon stock worth $70?
The author ends by stating that he is not an Amazon bear, but still does not consider the current trading price of $88 as an entry point.
Borrowing another Seeking Alpha author’s valuation, AWS would be worth $60 per share and its business $20. Since Tradevestor doesn’t believe the remaining segments are worth $8 per share, the author said he was willing to wait for the stock to hit $70.
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(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links These partnerships do not influence editorial content. Thank you for supporting Amazon Maven)
